The world’s biggest athletic merchandise manufacturer, Nike (NKE), has recently released its quarterly results that were better than market’s expectations. The company has significantly increased its advertising expenditure, which it calls demand creation, as it gears up for the upcoming FIFA world cup in Brazil which is only three months away. The company has also, reportedly, forged a massive $1 billion deal with Manchester United (MANU).

For the world cup, Nike has got more kit-sponsorship deals than any of its rivals. Nike’s shares have risen by 14.5% in the last 12 months and closed at $73.54 on Friday. According to analysts’ estimates compiled by Thomson Reuters, Nike’s revenues and earnings could grow by 10% in the current fiscal year which ends in May, 2014 to $27.1 billion and $2.97 per share.

Since the current fiscal year ends just a month before the FIFA world cup, therefore the positive impact of the company’s world cup related efforts will not become evident until the end of the next fiscal year.

Beating Expectations

During the third quarter of the current fiscal year, Nike’s revenues climbed 12.7% to $6.97 billion, which was better than analysts’ expectations of $6.69 billion. Although the company’s net income dropped by 20.9% to $685 million, its net income from continuing operations was up 3%. Adjusted earnings came in at $0.76 per share, which was also better than market’s expectations of $0.72 per.

Nike reported an across the board increase in revenues in all the regions, with the exception of Japan where its revenues dropped due to weaker yen and higher expenses launch of Nike.com in the country. However, on a constant currency basis, the revenues from Japan were up 10% from last year.

Revenues (US$’000) For 3 months ending February 28, 2014

Regions

2012

2013

% Change

North America

$2,737

$3,069

12.1%

Western Europe

$1,057

$1,292

22.2%

Central & Eastern Europe

$303

$356

17.5%

Greater China

$641

$697

8.7%

Japan

$195

$177

-9.2%

Emerging Markets

$867

$937

8.1%

The increase in prices, coupled with the growth in higher margin direct-to-consumer sales, caused a 30-basis-points increase in gross profit margin to 44.5%.

At the end of the last quarter, Nike’s future orders for deliveries from March through July were $10.9 billion, which is 12% higher as compared to last year’s future orders in the same period. The biggest increase in future orders, of 33%, was witnessed in Western Europe where soccer is the most popular form of sport.

In the previous quarter, Nike reported an 18% year-over-year increase in demand creation expenditure to $733 million. This was due to higher investments in retail product presentation, a rise in marketing expenses related to some key product launches and the upcoming soccer world cup.

Nike has also moved some of the planned expenditure for the previous quarter to the current quarter. As a result, Nike is now expecting a 30% growth in demand creation expenses.

Betting Big on Soccer

This jump in demand creation comes as no surprise as Nike is already known for spending billions on demand creation, particularly during the FIFA world cup. Last year Nike spent $2.7 billion on demand creation as it tries to put its logo on the kit of some of the most popular athletes in the world. And the company has every reason to dole out millions in trying to do that, as soccer kit is a massive industry which generates revenues of more than $5 billion each year.

The mega event usually gives a boost to Nike’s growth. The company already generates nearly $2 billion in revenues from soccer. The company is the official kit provider for 11 teams, including the host Brazil, out of a total of 32 qualifying teams. In these terms, Nike is ahead of its competitor Adidas (ADDYY) and Puma AG (PMMAF), who could manage to secure eight sides each.

Besides the international teams, Nike has also forged partnerships with some of the biggest clubs in sports, such as Manchester United and New York Yankees.

Nike has reportedly signed a massive 10-year deal valued at $1 billion with Manchester United, replacing the old 13-year$507 million agreement which expires in 2015. Nike is betting on the rise of the English Premier League, which has become significantly more valuable since the last time Nike signed its deal with Manchester United, more than a decade ago. It is becoming increasingly popular in the U.S., from which Nike generated more than 40% of its revenues, and is the biggest thing in Europe, from which Nike gets 16% of its revenues. This is the reason why the current deal is more than twice as expensive as the old one.

Three years ago, Nike’s rival Under Armour (UA) signed its first British soccer club deal with Tottenham Hotspur. Since then, the club has not secured any of the three leading positions in the English Premier League. Manchester United has not been doing that great either, particularly following the retirement of its iconic manager Alex Ferguson. The club was on the sixth position on the league table, as it struggled to find a place in the Champion’s League – an annual tournament which features the top performing clubs from Europe.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

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